Shipowners respond to EU competition exemption review

Here we go again: Shipowners and shippers are squaring up once more for another battle over whether liner shipping can be exempted from European Union (EU) competition rules.

The International Chamber of Shipping (ICS) asserted in a recent statement that, to “serve as many ports and customers as possible, as efficiently as possible, international ocean carriers often share space on vessels”.

Liner services to the EU are regulated through the Consortia Block Exemption Regulation (CBER), which expires in April 2024. This is now under review by the European Commission’s Directorate-General for Competition.

In response, the World Shipping Council (WSC), ICS, and the Asian Shipowners’ Association (ASA) have submitted their input to the European Commission, calling for a renewal of the CBER. They argue that vessel-sharing contributes to the EU policy goals of reducing transport emissions, increasing competitiveness and improving efficiency to reduce costs.

In a statement, the ICS contended: “Vessel-sharing is a purely operational measure that enables carriers to use ships more efficiently, while continuing to compete on price and other commercial terms. Vessel-sharing expands the range of destinations and services available to customers, and reduces empty space onboard ships, lowering emissions. The CBER facilitates the practice by providing a sector-specific legal framework.”

The secretary-general of the Asian Shipowners Association (ASA), Yuichi Sonoda, said: “From an operational and environmental perspective, vessel-sharing is like public transport and car-pooling schemes. It seeks to maximise efficiency and reduce emissions through the shared use of transport assets and infrastructure, significantly reducing emissions per unit of cargo transported.”

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Before the EU banned it, shipping’s mechanism for ensuring regular liner services was the liner conference system, the members of which shared a particular geographical trade. The system also imposed standard tariffs based on cargo value.

Of course, that was anathema to competition regulators. Since the effective end of the conference system, there has been massive consolidation of the liner companies, presumably the opposite of being anti-cartel. However, the consortia emerged as the industry’s mechanism for enabling regular services to be provided, and it is important to understand exactly what rules apply to these consortia.

The EU’s CBER, in some form, has been in place since 1995, and in its current form since 2009. It was adopted for a period of five years and, since then, it has been extended twice – first in 2014 and again in 2020 – following evaluations by the commission. The current arrangement expires on Apr 25, 2024, unless the current review results in a further extension.

The CBER imposes strict conditions on consortia. It applies only to ocean carriers with a combined market share of below 30 per cent. Vessel-sharing agreements (VSA) can only be for the purpose of improving service and efficiency. Companies within the consortia are strictly prohibited from exchanging information on rates. Each member of a VSA determines its own commercial terms, including prices. Crucially, carriers within a VSA compete with each other, and with other carriers outside that VSA when selling their services to customers.

As the ICS statement acknowledged, the commission’s evaluation of the CBER is taking place against the backdrop of an unprecedented global crisis.

Covid-19 disrupted the intermodal supply chain worldwide, creating substantial bottlenecks in marine terminals, inland warehouses and distribution centres, and in the truck, rail, and barge systems that connect ports with the hinterland. The ICS added: “Those landside issues have in turn caused backups of ships outside ports, significantly reducing the effective vessel capacity, even as ocean carriers have deployed every available owned and chartered container ship. Reliability has suffered and prices have increased.”

What the statement does not mention is that freight rates and liner companies’ profits have soared as effective capacity has shrunk. This has stoked opposition, both in the EU and the United States, to the lines benefiting from exemption from competition regulations.

However, those railing against container shipping lines conveniently forget that these lines have either made abysmally low profits or have even been in the red for most of the time since container ships replaced general cargo vessels.

Countering a wave of antagonism against container lines, John Butler, president and chief executive of the World Shipping Council, which represents the sector, said: “The frustration that shippers have understandably experienced from service delays and increased cost has been channelled towards carriers, their vessel-sharing arrangements, and the regulatory tools which facilitate such arrangements, including the CBER. But data shows – and regulators concur – that the problems have been caused by factors outside carriers’ control, not by vessel-sharing,”

ICS secretary-general Guy Platten argued: “Vessel-sharing is a tool that has been recognised by regulators around the world as providing a foundation for the reliable movement of international trade. As we come out of the pandemic and markets normalise, we need common and predictable regulations across the globe in order to help transportation and trade networks to stabilise.”

Stabilise? Well, all indications are that the world economy is in for a bumpy ride. One of those indications is that spot freight rates on the Shanghai Containerised Freight Index – had, by last week, fallen 51 per cent since the end of July, said HSBC Global Research. It predicts that spot rates could be back to 2019 levels by the end of the year. And that would mean contract rates would inevitably follow.

So it would seem that the party is almost over for container lines, and that the low profitability that has bedevilled liner shipping since the advent of the container will return next year. This is bad news for the shipping industry, but there is a (rather thin) silver lining: Falling rates undermine the contention that consortia can effectively control rates through vessel-sharing arrangements.

Will the CBER be extended? Who knows? Once again, the fate of a large sector of the global shipping industry is one-sidedly in the hands of the EU’s politicians and bureaucrats.